Retirement or Death of a Partner Test - 7

Sometimes with the consent of all the partners, firm may pay extra amount to the outgoing partner other than his capital amount which is known as Goodwill amount.

Following journal entry will take place:

B’s Capital A/c    Dr.  10000

    To A’s Capital A/c  5000

    To C ’s Capital A/c 5000

Old Ratio = 3:2:1 (Capital Ratio)

New Ratio of A and B after the retirement of C = 1:2

B is the only gainer i.e. 2/6

B will be debited with 30,000 × 2/6 = Rs. 10,000

The valued identified here are:

•Respect for law

•Responsibility towards society

•Righteous behavior

When gain share of partners is given in the question, in such a case to find out the new share of continuing partners, share acquired by them should be added to their old share. we can say, New ratio = Old ratio + Gaining ratio

Following Accounts are temporary accounts which are prepared only for the settlement:

•Revaluation Account

•Profit and Loss Suspense Account

At the time of death of a partner, a temporary account is opened, which is known as Profit and loss suspense account. The main purpose of this account is to calculate and transfer the share of deceased partner to his account (up to the date of his death).

Sometimes amount due to retiring partner is treated as loan in the business for which interest is paid to the outgoing partner. Such amount is payable to the outgoing partner in installments with interest. This settlement can be done on the basis of pre decoded terms or conditions among the partners.

The amount of loss due to the deceased partner (up to the date of his death) will be debited to his capital account and same will be shown in balance sheet asset side also as profit and loss suspense account.

R’s share of goodwill will be calculated as follows:

Total goodwill = Rs.60,000

R’s Share = 2/6

R’s Share of Goodwill = 60,000 x 2/6 = Rs. 20,000

Following journal entry will be recorded at the time of R’s Retirement:

T’s Capital A/c    Dr. 20000
    To R's Capital a/c  20000

R’s Share = 2/6 R’s Share of Goodwill = 60,000 x 2/6 = 20,000 Only T is gainer so he will be debited and R’s capital account will be credited.

At the time of retirement, goodwill given in the balance sheet should be debited to the partners in their old profit sharing ratio (including the outgoing partner).it is called writing off the goodwill.

Deceased partner’s share of profit can be calculated on the basis of the time and sales. His share of profit will be transferred to his capital account.

At the time of retirement of death of a partner we need to calculate the gaining ratio of the existing partners. The main purpose of calculating gaining ratio is to adjust the share of goodwill at the time of retirement or death of a partner.

A new partner can be admitted with consent of all the partners. Once all the partners are ready, court will never interfere in such settlements.

After the retirement of Z, new ratio of X and Y will be 5:4.

By making the base equal of all partners ratio ,it will be:-

L.C.M will be 10.Hence, Ratio will be 5:4:1 and after retirement of z it will be 5:4.

At the time of death or retirement of a partner, continuing partners may decided to new profit sharing ratio.

At the time of retirement or death of a partner, while adjusting the capital accounts, preliminary expenses given in the balance sheet should be debited to all the partners in their old profit sharing ratio.

A partner can get retirement in the following ways:

(1) With the consent of all the partners

(2) Due to ill health

(3) Agreement/contract is over

(4) By giving notice

Any asset taken by the partner will be shown in the debit side of his capital account. It means his capital account will be reduced by the same.

The amount payable to deceased partner’s executor as profit (up to the date of death) will be transferred to the credit side of deceased partner’s capital account and same will be shown in the assets side of the balance sheet.

Bad debts recovered will be shown in the credit side of revaluation account by which revaluation profit will increase. The amount received in the form of bad debts recovered will be added to cash while preparing balance sheet.

In the absence of partnership deed profit sharing ratio will be equal. In this case, M is right; profit should be shared equally among the partners i.e. 4,000 equally among all the partners.

Share of a deceased partner will be transferred to his executor or legal heirs because partner is already died and he cannot receive his share. Executor of deceased partner receives share of profit on behalf of a deceased partner.

When a partner is retired from the firm, there will be change in the ratio of remaining partners because retiring partner will give his share to remaining partners. It is necessary to find out the new ratio of existing partners.

The main purpose of Preparing Profit and Loss Suspense Account is to adjust the profit of deceased partner.This is just a temporary account.It is to be shown on the cr. side of capital account of partners.